Read this post to know the answer of one of the most important questions – Is ITC worth investing?
Let’s dig deeper into this analysis.
Brief about Company:
The established multinational conglomerate company headquartered in Kolkata, India at “Virginia House, building”. Until the 1970s, the company was known as ‘Imperial Tobacco Company’ later renamed as ‘Indian Tobacco Company’ and then in 1974, to ‘I.T.C Ltd’. By the end of 2001, the company renamed (by removing the ‘full stops’) as “ITC limited”.
A diversified Conglomerate FMCG company with business products in Foods, Personal Care, Cigarettes and Cigars, Branded Apparel, Education & Stationery Products, Incense Sticks and Safety Matches; Hotels, Paperboards and Packaging, Agri-Business and Information Technology, and many more.
Today, ITC is amongst the top FMCG companies in India raking at No.3. ITC Ltd has a market cap of over Rs.2.25 lakh crores. With an expertise of over a century and a deep understanding of the Indian consumer mindset. The Company has garnered the majority of market share through its various product lines.
Who is the owner of ITC Limited?
Although there is no one promoter to ITC limited. The ownership is diluted amongst many large Fund house and Institutional investors who find value in the company. Amongst many, the top shareholders in the company (other than Directors, Promoters and Holders of GDRs and ADRs) were as follows:
- Tobacco Manufacturers (India) Limited at (24.23%) of shareholdings.
- Life Insurance Corporation of India at (16.25%) of shareholdings.
- Specified Undertaking of the Unit Trust of India at (7.93%) of shareholdings.
- Myddleton Investment Company Limited at (3.96%) of shareholdings.
The cumulative holdings exceed 51% of the total shareholdings. Below is the table of ITC Ltd shareholdings as per its Annual Report – 2020.
|Sl.No||Category of Shareholders||No of shares held (As of March 2020)||Percentage of shares held (As of March 2020)|
|5||Banks / Financial Institutions||98,72,32,495.00||8.02|
What are ITC ltd products and services?
A wise man once told, “A picture is worth a thousand words”
Here’s a list of ITC Products and services, the same is extracted from the ITC Ltd Annual Report for the month of March 2020.
Branded Packaged Foods:
Personal Care Products:
Education & Stationery Products:
Agarbatti and Safety Matches Products:
ITC e-Choupal 4.0: Leveraging Digital Ecosystem for Farmers
Please note: The list is Non-exhaustive.
Is ITC a zero debt company?
As per the Annual Report dated March 2020, the company had a ‘Financial Liability’ (Non-current) of Rs. 355.35 crore and about Rs. 8,834.76 crore as in Current liability. Put together and other expenses (excluding provisions), the company has a liability of about Rs.10,944.47 crore.
And the companies Cash & Equivalents and other such assets value worth at Rs. 10,446.08 crore. Hence, I could see that the company is financially well secured.
[A current liability is such liability that’s supposed to be met within 12 months and non-current liability would be a liability that’s met over a long term period].
Also, the reserve of the company. I.e. the General Reserves of Rs. 17,585.31 crore and the Retained Earnings of Rs. 33,596.14 crore is quite a large amount.
Especially needed for a company that’s in a business such as FMCG. Hence, we can say that though the company is not a zero debt (there cannot be a company with zero debt). The companies financial position is well secured and well funded.
Companies will require credit (debt) to operate the day to day activities. Thought the company has a sufficient cash reserve. They tend to take loans and other modes of financial mediaries to assist in their production and management for the same is proved (if allocated well) to be cost-efficient and better utilization of resources.
Cash Flow Analysis:
Post adjustment, the company has provided with an operating income of Rs.13,806.18 crore. The company has spent amount as in Investing activities (purchase of current & non-current investments, purchase & sale of assets, dividend & interest income, etc) amounting to Rs. 5,516.71 crore and has spent as in Financial activities (Dividend paid, payment of liabilities, etc) amounting to Rs. 7890.87 crore. Thus, providing a net cash inflow amounting Rs.398.60 crore.
Why is the ITC stock falling?
There are many reasons for the stock price to react the way it does. In the stock market, there is a reaction for each action. The price reacts to related or unrelated activities in the market. Few reasons noted for the share price drop are as follows:
- Disposal or Pledge of a large number of shares by Designated persons.
- Negative news or rumors about the company/sector.
- Unexpected negative financial figures.
- Mis-management intentional or unintentional that affects the Company.
- Change in Future perspective or outlook.
Have looked into the above-mentioned points and the company came out clean. The company financially is doing reasonably well. I see no reason for the same to go bad in the near term. Though I have found some issues, the same will be discussed in the latter part of this article. I’m positive about the company’s overall performance and wellbeing.
(Disclosure: I own ITC shares in my portfolio and have been invested since long).
Reason for ITC pricing!
Extreme stock dilution is seen in the past three decades. The company has over 1,230.5 crore equity shares, that’s equivalent to 10 shares for every Indian (As per the 2011 senses population). The management has allowed for 5 Bonus issues and 1 stock split resulting in an excess amount of shares in the holder’s account at the same valuation. This optimum dilution results in excess volume of shares to be traded in the market. Resulting in more volatility.
Stock Dilution Table:
|1||30th September, 1991||Bonus||03:05||160.00|
|2||12th July, 1994||Bonus||01:01||320.00|
|3||17th June, 2005||Bonus||01:02||480.00|
|4||21st September, 2005||Split||10:01||5,280.00|
|5||18th June, 2010||Bonus||01:01||10,560.00|
|6||20th May, 2016||Bonus||01:02||15,840.00|
The chart above chart says that, If an investor had bought 100 shares at the beginning of 1991. He/She would be holding 15,840 shares (Excluding Rights Issue) as of 2020. This stock dilution had made access to the retail investor to buy the shares at a lower price.
But, the same doesn’t provide any additional value to the investors. It just seems the price is cheaper where in fact the value remains the same.
Example: If you own 100 shares of ITC at a Face value of Rs.10 per share. It is the equivalent to Rs.1,000 worth. And, If you own 1,000 shares of ITC at a Face value of Rs.1 per share. It is the equivalent of the same Rs.1,000 worth. When the stock is diluted, the number of shares free float increases. If you own 1% of ITC, post a 1:10 stock split. You’ll still own the same 1%. Just the number of shares you own has increased.
The dilution is like giving us 12 slices of pizza and saying its more when the same is given to each of the shareholders. It makes no difference. You are just increasing the number of slices. The actual quantity of pizza remains the same (1 Pizza = 12 Slice). The split, Bonus & the Rights Issues have given us with more number of shares (Pizza slice). The intrinsic worth of the company remains the same (1 Whole Pizza).
Is ITC a good stock for long term investment?
Unfortunately, many investors chase the unknown companies in this hope to catch a multi-bagger stock. But, on this journey. The budding investors give less consideration towards the safety of Capital allocated. Remember, one has to first consider saving his capital and then comes returns.
And, such company that’s well established being ‘Cash Rich Companies’ are less likely to go broke. Hence, might be a great addition to one’s portfolio as a long term investment.
Here are some financial figures:
|1||5 Years Average ROCE (In %)||35.11|
|2||5 Years Average ROE (In %)||23.99|
|3||5 Years Average OPM (In %)||37.81|
|4||Price to Earnings ratio (In %)||14.83|
|5||Enterprise Value to EBITDA ratio (In %)||10.56|
|6||Price to Book multiples of Prive to Earnings ratio (In %)||49.98|
|7||Price to Earnings Growth ratio (In %)||1.42|
|8||Interest Coverage ratio (In %)||330.09|
|9||Debt to Equity ratio (In %)||–|
|10||Retrun on Capital Employed (In %)||32.56|
|11||Retrun on Equity (In %)||25.29|
|12||Return on Invested Capital (In %)||46.78|
|13||Return on Asset (In %)||24.98|
|14||Enterprise Value (In Rs. Crores)||2,12,762.59|
|15||Market Capital (In Rs. Crores)||2,19,762.48|
Disclaimer: I’m not a SEBI-registered advisor, do a thorough analysis before investing, and do consider your investment advisor for more information.
If you are someone like me. Who believe in Indias “Democratic Capitalism”. Then, you’ll surely be optimistic about the Indian market as in general. I believe, a new shift in the consumption-driven economy that’s ought to happen will drive sectors such as FMCG, Insurance (personal & others), Banking and Financial Institutions, and many such to new highs.
ITC being a prominent FMCG company. I see more reason for the company to monetize its already established market position to pick up and generate value to the investors. Hence, I believe that the company be worth well in years to come.
The company should consider this!
- Cash position – I would rather see the company be fully invested in various investments and other activities than to see it be sitting on cash position.
- Dividend policy – FMCG sector is both ‘cut-throat competitive’ and ‘Cash sensitive’. And to see the company give out more of its cash as in ‘divided’ is worrisome. For the year ended March 2020, the company has provided dividends worth Rs. 7048.71 crore to its shareholders.
- Research and Development Expenses – The companies R&D Expenses are at 0.34% of its Gross Revenue. Amounting just under Rs. 155.39 crore for the year ended March 2020. FMCG companies, considering their competitive spirit. I wish the company gives more consideration towards the R&D spendings.
- Stock Dilution – Extreme Stock dilution has led to such low stock prices. The stock has not moved further for about a decade now. Mainly due to the split, bonus, and rights issue. This amount of free float of equity (Over 1,230 crore share count) is worrisome for the same has a huge impact on the stock price be it due to volatility or otherwise.
It depends on the type of Investor one is. Investing has always been termed risky (If one doesn’t know what he/she is doing). My question would be – “Do you think not investing is risk-free?”. In fact, not investing would be the riskiest of all. When you don’t invest, be it equity or any other asset classes, you take a chance. A chance that’s gonna turn out to be very costly in the latter part of your days.
If saving is your only option for retirement. Check out the savings interest income and the yearly inflation rate increase. Now, that we have established that investment is the only option. How to invest? The answer can be answered in many ways. Two of which are:
- Learn before you Earn.
- Take professional help.
To the majority of individuals, I suggest the latter. But, I personally believe in the prior one. Anyways, here’s my workings on what ITC should actually be worth as per its current earnings dated Q1 2020-21.
- Earnings Per Share (TTM) – Rs.11.50 (Will vary accordingly)
- The sales Growth rate for 5 Years Average – 4.95%
- Minimum Rate of Return (Expected) – 15%
- The margin of safety – 50% (Suggested, Safe and reliable)
- Enterprise Value to Earnings – Rs. 12.10 (Will vary accordingly)
For the given information, the Future Price, the Fair Value, and the Margin of safety shall be calculated based on Discounted Cash Flow Model as follows;
(Pease note: The figures arrived are as per the assumption of future earnings cash flow for 10 Years).
- Future Price = EPS*(1+growth)^10*EV
- Fair Value = Future Price/(1.15)^10
- The margin of Safety = Future Price – 50%
= 225.58 – 50%
Please note: The above-mentioned technique is the one that I use to arrive at the solution for the required query. An investor can do required changes as applicable.
Hence, based on my analysis (Discounted Cash Flow and others). I consider the company is reasonably valued. We cannot expect a well-established company to be priced exactly to its earnings capability. The premium we pay will be for the standard it maintains. Hence, these companies will quote at a premium price.
Disclaimer: All the information on this website is published in good faith and for general information purpose only.